Equilibrium Asset Pricing in Directed Networks

47 Pages Posted: 26 Sep 2018 Last revised: 21 Feb 2019

See all articles by Nicole Branger

Nicole Branger

University of Muenster - Finance Center Muenster

Christoph Meinerding

Deutsche Bundesbank

Patrick Konermann

BI Norwegian Business School

Christian Schlag

Goethe University Frankfurt - Research Center SAFE

Date Written: 2018

Abstract

Directed links in cash flow networks affect the cross-section of price exposures and market prices of risk in equilibrium. In an asset pricing model featuring mutually exciting jumps, we measure directedness through an asset's shock propagation capacity (spc). In the model, we prove: (i) Cash flow shocks of high spc assets command high market prices of risk, (ii) the price reaction of an asset to its own cash flow shocks is less pronounced for high spc assets. To illustrate our theoretical findings, we estimate an empirical network from industry cash flows and find support for these predictions.

Keywords: directed cash flow networks, directed shocks, mutually exciting processes, recursive preferences

JEL Classification: G01, G12, D85

Suggested Citation

Branger, Nicole and Meinerding, Christoph and Konermann, Patrick and Schlag, Christian, Equilibrium Asset Pricing in Directed Networks (2018). Deutsche Bundesbank Discussion Paper No. 37/2018. Available at SSRN: https://ssrn.com/abstract=3255395

Nicole Branger (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Christoph Meinerding

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Patrick Konermann

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Christian Schlag

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)

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